Publication 925

Cat. No. 64265X Department of the Treasury Internal Revenue Service

Contents
Introduction ........................................ Passive Activity Limits ...................... Who Must Use These Rules? ........ Passive Activities ............................ Activities That Are Not Passive Activities ................................... Passive Activity Income .................. Passive Activity Deductions ............ Grouping Your Activities ................. Recharacterization of Passive Income ..................................... Dispositions ..................................... How To Report Your Passive Activity Loss ............................. Example .......................................... At-Risk Limits ..................................... Who Is Affected? ............................ Activities Covered by the At-Risk Rules ........................................ At-Risk Amounts ............................. Amounts Not At Risk ...................... Reductions of Amounts At Risk ...... Recapture Rule ............................... How To Get More Information .......... Index .................................................... 1 2 2 2 4 5 6 6 7 8 9 9 19 19 19 20 21 21 21 22 23

Passive Activity and At-Risk Rules
For use in preparing

1998

Returns

Introduction
This publication discusses two sets of rules that may limit the losses you can deduct on your tax return from any trade, business, or income-producing activity. The first part of the publication contains the passive activity rules. The second part discusses the at-risk rules. However, when you figure your allowable losses from any activity, you must apply the at-risk rules before the passive activity rules.

Useful Items
You may want to see: Publication 527 Residential Rental Property (Including Rental of Vacation Homes) Partnerships

541

Form (and Instructions) 4952 Investment Interest Expense Deduction 6198 At-Risk Limitations 8582 Passive Activity Loss Limitations 8582–CR Passive Activity Credit Limitations 8810 Corporate Passive Activity Loss and Credit Limitations See How To Get More Information near the end of this publication for information about getting these publications and forms.

Passive Activity Limits
Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate during the tax year, or a rental activity. These terms are explained later. If you have a loss, you must determine your amount at risk in the activity. The at-risk rules are explained in the second part of this publication. After you figure your amount at risk, apply the rules in this part to find the amount of your passive activity losses that you can deduct. In general, you can deduct passive activity losses only from passive activity income. You carry any excess loss forward to the following year or years until used, or until deducted in the year you dispose of your entire interest in the activity in a fully taxable transaction. See Dispositions, later. Passive activity credits. You can subtract passive activity credits only from the tax on net passive income. Passive activity credits include the general business credit and other special business credits, such as the credit for fuel produced from a nonconventional source. Credits that are more than the tax on income from passive activities are carried forward. Unallowed passive activity credits, unlike unallowed passive activity losses, are not deductible when you dispose of your entire interest in an activity. However, to determine your gain or loss from the disposition, you can elect to increase the basis of the credit property by the amount of the original basis reduction for the credit, to the extent that the credit was not allowed because of the passive activity limits. You cannot elect to adjust the basis for a partial disposition of your interest in a passive activity. See the instructions for Form 8582–CR for more information. Publicly traded partnership. You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). You must also apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. You can offset losses from passive activities of a PTP only against income or gain from passive activities of the same PTP. Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the instructions for Forms 8582 and 8582–CR respectively.

rations directly, they do apply to the owners of these entities. Personal service corporation. For the passive activity rules, a corporation is a personal service corporation if it meets all of the following requirements. 1) It is not an S corporation. 2) Its principal activity during the “testing period” is performing personal services. The testing period for any tax year is the previous tax year. If the corporation has just been formed, the testing period begins on the first day of its tax year and ends on the earlier of: a) b) The last day of its tax year, or The last day of the calendar year in which its tax year begins.

Passive Activities
There are two kinds of passive activities—trade or business activities in which you do not materially participate during the tax year and rental activities. Material participation in a trade or business is discussed later under Activities That Are Not Passive Activities. Treatment of former passive activities. A former passive activity is an activity that is not a passive activity in the current tax year, but was a passive activity in any earlier tax year. If you have net income from a former passive activity in the current year and a prior year unallowed loss from that activity, you must offset your net income from that activity by the prior year unallowed loss. Treat any remaining prior year unallowed loss like you treat any other passive loss. You must also offset the allocable part of your current year tax liability with any prior year unallowed passive activity credits from a former passive activity. The allocable part of your current year tax liability refers to that part of this year's tax liability that is allocable to the current year net income from the former passive activity. You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero).

3) Its employee-owners substantially perform the services in (2). This requirement is met if more than 20% of the corporation's compensation cost for its activities of performing personal services during the testing period is for personal services performed by employeeowners. 4) Its employee-owners own more than 10% of the fair market value of its outstanding stock on the last day of the testing period.

Trade or Business Activities
A trade or business activity is an activity that: 1) Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), 2) Is conducted in anticipation of starting a trade or business, or 3) Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding property for investment. You generally report trade or business activities on Schedule C, C–EZ, F, or in Part II or III of Schedule E.

Personal services. Personal services are those in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, and consulting. Employee-owners. A person is an employee-owner of a personal service corporation if both of the following apply.
1) He or she is an employee of the corporation, or performs personal services for or on behalf of the corporation (even if he or she is an independent contractor for other purposes), on any day of the testing period. 2) He or she owns any stock in the corporation at any time during the testing period. Closely held corporation. For the passive activity rules, a corporation is closely held if all of the following apply. 1) It is not an S corporation. 2) It is not a personal service corporation, defined earlier. 3) At any time during the last half of the tax year, more than 50% of the value of its outstanding stock is directly or indirectly owned by five or fewer individuals. “Individual” includes certain trusts and private foundations.

Rental Activities
A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. See Real Estate Professional later under Activities That Are Not Passive Activities. An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. It does not matter whether the use is under a lease, a service contract, or some other arrangement. Exceptions. Your activity is not a rental activity if any of the following apply. 1) The average period of customer use of the property is 7 days or less. You figure the average period of customer use by

Who Must Use These Rules?
The passive activity rules apply to: 1) Individuals, 2) Estates, 3) Trusts (other than grantor trusts), 4) Personal service corporations, and 5) Closely held corporations. Even though the rules do not apply to grantor trusts, partnerships, and S corpoPage 2

Net active income offset. A closely held corporation can offset net active income with its passive activity loss. It can also offset the tax attributable to its net active income with its passive activity credits. However, a closely held corporation cannot offset its portfolio income (defined later under Passive Activity Income) with its passive activity loss. Net active income is the corporation's taxable income figured without any income or loss from a passive activity or any portfolio income or loss.

dividing the total number of days in all rental periods by the number of rentals. If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. The numerator of the fraction is the gross rental income from that class of property, and the denominator is the activity's total gross rental income. The activity's average period of customer use will equal the sum of the amounts for each class. 2) The average period of customer use of the property, as figured in (1), is 30 days or less and you provide significant personal services with the rentals. Significant personal services include only services performed by individuals. They do not include: a) b) Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs.

If you meet any of the exceptions

TIP listed above, see the instructions for
Form 8582 for information about how to report any income or loss from the activity.
Rental real estate activities. If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your offset amount cannot exceed $12,500. However, if you lived with your spouse at any time during the year and are filing a separate return, you cannot use this special offset to reduce your nonpassive income or tax on nonpassive income. The offset amount is reduced if your modified adjusted gross income exceeds certain amounts. See Phaseout rule, later.

activity (including your spouse's interest) was at least 10% by value of all interests in the activity throughout the year. Active participation is not required to take low-income housing and rehabilitation investment credits from rental real estate activities.

Example. Mike, a single taxpayer, had the following income and loss during the tax year:
Salary ......................................................... $42,300 Dividends ................................................... 300 Interest ....................................................... 1,400 Rental loss ................................................. (4,000)

The rental loss came from a house Mike owned. He advertised and rented the house to the current tenant himself. He also collected the rents, and either did the repairs or hired someone to do them. Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated.

c)

3) You provide extraordinary personal services in connection with customer use. Services are extraordinary personal services if individuals perform them, and the customer's use of the property is incidental to their receipt of the services. 4) The rental is incidental to a nonrental activity. The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. The rental of property is incidental to a trade or business activity if all of the following apply. a) b) You own an interest in the trade or business activity during the year. The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value.

Example. Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and less than $100,000 of modified adjusted gross income. She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. Because she actively participated in her rental real estate activities, she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). Active participation. Active participation is not the same as material participation, defined later. Active participation is a less stringent standard than material participation. For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Only individuals can actively participate in rental real estate activities. However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. The choice applies to tax years ending after the decedent's death and before:

Phaseout rule. This special $25,000 offset ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special offset. Modified adjusted gross income for this purpose is your adjusted gross income figured without the following:
1) Taxable social security and tier 1 railroad retirement benefits, 2) Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans, 3) The exclusion from income of interest from qualified U.S. savings bonds used to pay qualified higher education expenses, 4) The exclusion from income of amounts received from an employer's adoption assistance program, 5) Any passive activity loss, or any rental real estate loss allowed because you materially participated in the rental activity as a real estate professional (as discussed later under Activities That Are Not Passive Activities), 6) Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582), 7) The deduction for half the selfemployment tax, or 8) The deduction allowed for interest on student loans.

c)

• 2 years after the decedent's death if no
estate tax return is required, or

• 6 months after the estate tax liability is
finally determined if an estate tax return is required. The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). Limited partners cannot actively participate in the partnership's rental real estate activities. You do not actively participate in a rental real estate activity unless your interest in the

5) You customarily make the rental property available during defined business hours for nonexclusive use by various customers. 6) You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity.

Example. During 1998 John was unmarried and was not a real estate professional. For 1998 he had $120,000 in salary, and a $31,000 loss from his rental real estate activities in which he actively participated. His modified adjusted gross income is $120,000. When he files his 1998 return, he may deduct only $15,000 of his passive activity loss. He must carry over the remaining $16,000 passive activity loss to 1999. He figures his deduction and carryover as follows:
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Adjusted gross income, modified as required .................................................. $120,000 Minus amount not subject to phaseout ... 100,000 Amount subject to phaseout rule ............. $20,000 Multiply by 50% ....................................... × 50% Required reduction to offset amount ....... $10,000 Maximum offset ....................................... $25,000 Minus required reduction (see above) ..... 10,000

ests in the activity. See Temporary Regulations section 1.469–1T(e)(6). 5) Rental real estate activities in which you materially participated as a real estate professional. See Real Estate Professional, later.

2) Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). Participation. In general, any work you do in connection with an activity in which you own an interest when you do the work is treated as participation in the activity. Work not usually performed by owners. You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. 1) The work is not work that is customarily done by the owner of that type of activity. 2) One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules.

Adjusted offset amount ............................ $15,000 Passive loss from rental real estate ........ $31,000 Deduction allowable/ Adjusted offset amount (see above) ............................... 15,000 Amount that must be carried forward ...... $16,000

You should not enter income and losses from these activities on Form CAUTION 8582, but on the forms or schedules you would normally use.

!

Material Participation
A trade or business activity is not a passive activity if you materially participated in the activity. You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. 1) You participated in the activity for more than 500 hours. 2) Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. 3) You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year. 4) The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities, later, under Recharacterization of Passive Income. 5) You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. 6) The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. 7) Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis. You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Your participation in managing the activity does not count in determining whether you materially participated under this test if: 1) Any person other than you received compensation for managing the activity, or

Phaseout rule for certain credits. A higher phaseout range applies to low-income housing credits for property placed in service before 1990 and rehabilitation investment credits from rental real estate activities. For those credits, the phaseout of the $25,000 offset starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). There is no phaseout of the $25,000 offset for low-income housing credits for property placed in service after 1989. If you hold an indirect interest in the property through a partnership, S corporation, or other passthrough entity, this special exception will not apply unless you also acquired your interest in the pass-through entity after 1989. You apply the $25,000 offset first to passive activity losses, then to credits other than the rehabilitation and low-income housing credits, then to rehabilitation credits and lowincome housing credits for property placed in service before 1990. You apply any remaining offset to low-income housing credits for property placed in service after 1989.

Participation as an investor. You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. Work you do as an investor includes:
1) Studying and reviewing financial statements or reports on operations of the activity, 2) Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and 3) Monitoring the finances or operations of the activity in a nonmanagerial capacity. Spouse's participation. If you are married for the tax year, your participation in an activity includes your spouse's participation. This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. Proof of participation. You can use any reasonable method to prove your RECORDS participation in an activity for the year. You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation some other way. For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary.

Activities That Are Not Passive Activities
The following are not passive activities. 1) Trade or business activities in which you materially participated for the tax year. 2) A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). It does not matter whether you materially participated in the activity for the tax year. However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. See Temporary Regulations section 1.469–1T(e)(4)(ii). 3) The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. 4) An activity of trading personal property for the account of those who own interPage 4

Limited partners. If you owned an activity as a limited partner, you generally did not materially participate in the activity. However, you did materially participate in the activity if you materially participated for the tax year under test (1), (5), or (6). You are not treated as a limited partner, however, if you were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). Retired or disabled farmer and surviving spouse of a farmer. If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. Similarly,

if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. Corporations. A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. See Special exception for qualified corporations under Activities Covered by the AtRisk Rules, later.

• • • • • • •

Develops or redevelops. Constructs or reconstructs. Acquires. Converts. Rents or leases. Operates or manages. Brokers.

9) Overall gain from any interest in a publicly traded partnership. See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. 10) State, local, and foreign income tax refunds. 11) Income from a covenant not to compete. 12) Income from the reimbursement of a prior year casualty or theft loss if the income is included in gross income and the loss deduction was not a passive activity deduction. 13) Alaska Permanent Fund dividends. 14) Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. See chapter 8 of Publication 535, Business Expenses, for information about the rules for allocating interest. Disposition of property interests. Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. An exception to this general rule may apply if you previously used the property in a different activity. Exception for more than one use in the preceding 12 months. If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. Any gain allocated to a passive activity is passive activity income. For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the smaller of: 1) $10,000, or 2) 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition.

Closely held corporations. A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participates.

Passive Activity Income
In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions (discussed later). Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. Passive activity income does not include the following items. 1) Income from an activity that is not a passive activity. These activities are discussed earlier under Activities That Are Not Passive Activities. 2) Portfolio income. This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. 3) Personal service income. This includes salaries, wages, commissions, selfemployment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. 4) Income from positive section 481 adjustments allocated to activities other than passive activities. (Section 481 adjustments are adjustments that must be made due to changes in your accounting method.) 5) Income or gain from investments of working capital. 6) Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed earlier in item (2) under Activities That Are Not Passive Activities. This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. 7) Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. 8) Any other income that must be treated as nonpassive income. See Recharacterization of Passive Income, later.

Real Estate Professional
Generally, rental activities are passive activities even if you materially participated in them. However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interest in rental real estate activities as one activity. See the instructions for Schedule E (Form 1040) for information about making this choice. If you qualified as a real estate professional for 1998, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 42 of Schedule E (Form 1040). If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. Qualifications. You qualified as a real estate professional for the year if you met both of the following requirements. 1) More than half of the personal services you performed in all trades or businesses were performed in real property trades or businesses in which you materially participated. 2) You performed more than 750 hours of services in real property trades or businesses in which you materially participated. Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. However, you can count your spouse's participation in an activity in determining if you materially participated. Real property trades or businesses. A real property trade or business is a trade or business that does any of the following with real property.

Exception for substantially appreciated property. The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies.
1) You used the property in a passive activity for 20% of the time you held your interest in the property. 2) You used the property in a passive activity for the entire 24-month period before its disposition. If neither condition applies, the gain is not passive activity income. However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners rePage 5

ceive only portfolio income as property held in a nonpassive activity and as property held for investment. Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. Disposition of property converted to inventory. If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. This rule applies only if you meet all the following conditions. 1) At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). 2) Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. 3) You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business.

9) Capital loss carryovers. 10) Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. 11) Net negative section 481 adjustments allocated to activities other than passive activities. (Section 481 adjustments are adjustments required due to changes in accounting methods.) 12) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. 13) The deduction for one-half of selfemployment tax.

Philadelphia. Depending on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. For example, John may be able to group the movie theaters and the bakeries into: 1) One activity, 2) A movie theater activity and a bakery activity, 3) A Baltimore activity and a Philadelphia activity, or 4) Four separate activities.

Grouping Your Activities
You can treat one or more trade or business activities or rental activities as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. Grouping is important for a number of reasons. If you group two activities into one larger activity, you need only show material participation in the activity as a whole. But if the two activities are separate, you must show material participation in each one. On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity.

Example 2. Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. Betty is also a partner in DEF (a trucking business). ABC and DEF are under common control. The main part of DEF's business is transporting goods for ABC. DEF is the only trucking business in which Betty is involved. Following the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity.
Consistency and disclosure requirement. Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. You must meet any disclosure requirements that the IRS may have when you first group your activities and when you add or dispose of any activities in your groupings. However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements that the IRS may have. Regrouping by IRS. If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. Rental activities. In general, you cannot group a rental activity with a trade or business activity. However, you can group them together if the activities form an appropriate economic unit and: 1) The rental activity is insubstantial in relation to the trade or business activity, 2) The trade or business activity is insubstantial in relation to the rental activity, or 3) Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity.

Appropriate Economic Units

Passive Activity Deductions
Passive activity deductions include all deductions from activities that are passive activities for the tax year and all deductions from passive activities that were disallowed under the passive loss rules in prior tax years and carried forward to the tax year. They include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than your entire interest in a passive activity. Passive activity deductions do not include the following items. 1) Expenses (other than interest) that are clearly and directly allocable to portfolio income. 2) Interest expense other than interest properly allocable to passive activities (e.g., qualified home mortgage interest and capitalized interest expense are not passive activity deductions). 3) Losses from dispositions of property that produce portfolio income or property held for investment. 4) State, local, and foreign income taxes. 5) Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. 6) Charitable contributions. 7) Net operating loss deductions. 8) Percentage depletion carryovers for oil and gas wells. Page 6

Generally, to determine if more than one activity forms an appropriate economic unit, you must consider all the relevant facts and circumstances. You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. The following factors have the greatest weight in determining whether activities form an appropriate economic unit. All of the factors do not have to apply to treat more than one activity as a single activity. The factors that you should consider are: 1) The similarities and differences in the types of trades or businesses, 2) The extent of common control, 3) The extent of common ownership, 4) The geographical location, and 5) The interdependencies between or among activities, which may include the extent to which the activities: a) b) c) d) e) Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities.

Example 1. John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in

Example. Herbert and Wilma are married and file a joint return. Healthy Food, an S corporation, is a grocery store business. Herbert is Healthy Food's only shareholder. Plum Tower, an S corporation, owns and rents out a building. Wilma is Plum Tower's only shareholder. Plum Tower rents part of its building to Healthy Food. Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other.

Because Herbert and Wilma file a joint return, they are treated as one taxpayer for purposes of the passive activity rules. The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity.

Grouping of real and personal property rentals. In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property.
Certain activities may not be grouped. In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. 1) Holding, producing, or distributing motion picture films or video tapes. 2) Farming. 3) Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). For a list of section 1245 property, see Equipment leasing, later. 4) Exploring for, or exploiting, oil and gas resources. 5) Exploring for, or exploiting, geothermal deposits. If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. Limited entrepreneur. A limited entrepreneur is a person who: 1) Has an interest in an enterprise other than as a limited partner, and 2) Does not actively participate in the management of the enterprise. Activities conducted through another entity. A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. Once the entity groups its activities, you as the partner or shareholder of the entity may group those activities (following the rules of this section):

held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. See Material Participation under Activities That Are Not Passive Activities earlier, and Significant Participation Passive Activities under Recharacterization of Passive Income, later. Publicly traded partnership (PTP). You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. Partial dispositions. If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. But, you can only do this if you can show with reasonable certainty: 1) The amount of prior year deductions and credits disallowed under the passive activity rules that is allocable to the part of the activity disposed of, and 2) The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of.

Investment income and investment expense. To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, an equityfinanced lending activity, or the licensing of intangible property by a pass-through entity.

Significant Participation Passive Activities
A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. See Material Participation, earlier. If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. Worksheet A. Complete Worksheet A if you have income or losses from any significant participation activity. Enter the names of the activities in the left column. Column (a). Enter the number of hours you participated in each activity and total the column. If the total is more than 500, do not complete Worksheet A or B. None of the activities are passive activities because you satisfy test 4 for material participation. (See Material Participation under Activities That Are Not Passive Activities, earlier.) Report all the income and losses from these activities on the forms and schedules you normally use. Do not include the income and losses on Form 8582. Column (b). Enter the net loss, if any, from the activity. Net loss from an activity means either: 1) The activity's current year net loss (if any) plus prior year unallowed losses (if any), or 2) The excess of prior year unallowed losses over the current year net income (if any). Enter -0- here if the prior year unallowed loss is the same as the current year net income.

Recharacterization of Passive Income
Net income from the following passive activities may have to be recharacterized and excluded from passive activity income:

• • • •

Significant participation passive activities, Rental of nondepreciable property, Equity-financed lending activities, Rental of property incidental to development activities, ities, and

• Rental of property to nonpassive activ• Licensing of intangible property by
pass-through entities. If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or the worksheets. Instead, enter income or losses on the form and schedules you normally use. But see Significant Participation Passive Activities, later, if the activity is a significant participation passive activity and you also have net loss from a different significant participation passive activity. Limit on recharacterized passive income. The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities, cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules.

• With each other, • With activities conducted directly by you,
and

• With activities conducted through other
entities.

CAUTION

!

You may not treat activities grouped together by the entity as separate activities.

Column (c). Enter net income, if any, from the activity. Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. Column (d). Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). If column (d) is a net loss, skip Worksheet B. Include the income and losses in Worksheet 2 of Form 8582. If column (d) shows net income and you must complete Form 8582 because you have other passive activities to report, complete Worksheet B. However, you do not have to complete Form 8582 if column (d) shows net income and you have only significant participation activities. If you do not have to complete Form 8582, skip Worksheet B and report the net income and net losses from columns (b) and (c) on the forms and schedules you normally use.
Worksheet B. List only the significant participation passive activities that have net income as shown in column (c) of Worksheet A. Page 7

Personal service and closely held corporations. You may group an activity conducted through a personal service or closely

Worksheet A. Significant Participation Passive Activities
Name of Activity (a) Hours of Participation (b) Net loss (c) Net income (d) Combine totals of cols. (b) and (c)

Totals

Column (a). Enter the net income of each activity from column (c) of Worksheet A. Column (b). Divide each of the individual net income amounts in column (a) by the total of column (a). Enter the ratio for each of the activities in column (b). The total of the ratios should equal 1.00. Column (c). Multiply the amount in the Totals row of column (d) of Worksheet A by each of the ratios in column (b). Enter the results in column (c). Column (d). Subtract column (c) from column (a). To this figure, add the amount of prior year unallowed losses, if any, that reduced the current year net income. Enter the result in column (d). Enter these amounts on Worksheet 2 of Form 8582. (But see Limit on recharacterized passive income, earlier.)

Rental of Property Incidental to a Development Activity
Net passive income from this type of activity will be treated as nonpassive income if all of the following apply. 1) You recognize gain from the sale, exchange, or other disposition of the rental property during the tax year. 2) You started to rent the item of property less than 12 months before the date of disposition. 3) You materially participated or significantly participated for any tax year in an activity that involved the performance of services for the purpose of enhancing the value of the property (or any other item of property if the basis of the property disposed of is determined in whole or in part by reference to the basis of that item of property). For more information, see Regulations section 1.469–2(f)(5).

This recharacterization rule does not apply if: 1) The expenses the entity reasonably incurred in developing or marketing the property exceed 50% of the gross royalties from licensing the property that are includable in your gross income for the tax year, or 2) Your share of the expenses the entity reasonably incurred in developing or marketing the property for all tax years exceeded 25% of the fair market value of your interest in the intangible property at the time you acquired your interest in the entity. For purposes of (2) above, capital expenditures are taken into account for the entity's tax year in which the expenditure is chargeable to a capital account, and your share of the expenditure is figured as if it were allowed as a deduction for the tax year.

Rental of Nondepreciable Property
If you have net passive income (including prior year unallowed losses) from renting property in a rental activity, and less than 30% of the unadjusted basis of the property is subject to depreciation, you treat the net passive income as nonpassive income.

Dispositions
Any passive activity losses (but not credits) that have not been allowed (including current year losses) generally are allowed in full in the tax year you dispose of your entire interest in the passive (or former passive) activity. However, for the losses to be allowed, you must dispose of your entire interest in the activity in a transaction in which all realized gain or loss is recognized. Furthermore, the person acquiring the interest from you must not be related to you.

Example. Calvin acquires vacant land for $300,000, constructs improvements at a cost of $100,000, and leases the land and improvements to a tenant. He then sells the land and improvements for $600,000, realizing a gain of $200,000 on the disposition. The unadjusted basis of the improvements ($100,000) equals 25% of the unadjusted basis of all property ($400,000) used in the rental activity. Calvin's net passive income from the activity (which is figured with the gain from the disposition, including gain from the improvements) is treated as nonpassive income.

Rental of Property to a Nonpassive Activity
If you rent property to a trade or business activity in which you materially participated, net rental income from the property is treated as nonpassive income. This rule does not apply to net income from renting property under a written binding contract entered into before February 19, 1988. It also does not apply to property just described under Rental of Property Incidental to a Development Activity.

Licensing of Intangible Property by Pass-through Entities
Net royalty income from intangible property held by a pass-through entity in which you own an interest may be treated as nonpassive royalty income. This applies if you acquired your interest in the pass-through entity after the partnership, S corporation, estate, or trust created the intangible property or performed substantial services or incurred substantial costs for developing or marketing the intangible property.

If you have a capital loss on the disposition of an interest in a passive CAUTION activity, the loss may be limited by the capital loss rules. The limit is generally $3,000 for individuals. See Publication 544, Sales and Other Dispositions of Assets, for more information.

!

Equity-Financed Lending Activities
If you have gross income from an equityfinanced lending activity, the lesser of the net passive income or the equity-financed interest income is nonpassive income. For more information, see Temporary Regulations section 1.469–2T(f)(4). Page 8

Treatment of excess losses. If all gain or loss realized on the disposition is recognized, do not treat as a loss from a passive activity the excess of: 1) Any loss from the activity for the tax year (including losses carried over from prior years and any loss realized on the disposition), over

Worksheet B. Significant Participation Activities With Net Income—(Keep for your records)
Name of Activity with net income (a) Net income (b) Ratio See instructions (c) Nonpassive income See instructions (d) Passive income Subtract col. (c) from col. (a)

Totals

1.00

2) Net income or gain for the tax year from all other passive activities (taking into account prior year disallowed losses).

Example. Ray earned a $60,000 salary and owned one passive activity through a 5% interest in the B Limited Partnership. He sold his entire interest in the current tax year to an unrelated person for $30,000. His adjusted basis in the partnership interest was $42,000, and he had carried over $2,000 of passive activity losses from the activity. Ray's deductible loss is $5,000, figured as follows:
Sales price ................................................. $30,000 Minus: adjusted basis ................................ 42,000 Capital loss ................................................ $12,000 Minus: capital loss limit .............................. 3,000 Capital loss carryover ................................ $9,000 Allowable capital loss on sale ................... $3,000 Carryover losses allowable ........................ 2,000 Total current deductible loss ..................... $5,000

each trade or business, rental, or investment activity in which the partnership owns an interest. If you dispose of your entire interest in a partnership, the passive activity losses from the partnership that have not been allowed generally are allowed in full. They also will be allowed if the partnership (other than a PTP) disposes of all the property used in that passive activity. If you do not dispose of your entire interest, the gain or loss allocated to a passive activity is treated as passive activity income or deduction for the year of disposition. This includes any gain recognized on a distribution of money from the partnership that you receive in excess of the adjusted basis of your partnership interest. These rules also apply to the disposition of stock in an S corporation. Dispositions by gift. If you give away any interest in a passive activity, the accumulated unused passive activity losses allocable to the interest cannot be deducted in any tax year. Instead, the basis of the transferred interest must be increased by the amount of these losses. Dispositions by death. If a passive activity interest is transferred because the owner dies, accumulated unused losses are allowed (to a certain extent) as a deduction against the decedent's income in the year of disposition. The decedent's losses are allowed only to the extent they exceed the amount by which the transferee's basis in the passive activity has been increased under the rules for determining the basis of property acquired from a decedent. For example, if the basis of an interest in a passive activity in the hands of a transferee is increased by $6,000 and unused passive activity losses of $8,000 were allocable to the interest at the date of death, then the decedent's deduction for the tax year would be limited to $2,000 ($8,000 − $6,000). Partial dispositions. If you dispose of substantially all of an activity during your tax year, you may treat part of the activity disposed of as a separate activity. However, to treat the disposition of substantially all of an activity as a separate activity, you must show with reasonable certainty:

1) The amount of prior year deductions and credits disallowed under the passive activity rules that is allocable to the substantial part of the disposed activity, and 2) The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the disposed activity.

How To Report Your Passive Activity Loss
Reporting your passive activities may require more than one form or schedule. The actual number of forms depends on the number and types of activities you must report. Some forms and schedules that may be required are:

• Schedule C (Form 1040), Profit or Loss
From Business,

Ray deducts the $5,000 total current deductible loss in the current tax year. He must carry over the remaining $9,000 capital loss, which is not subject to the passive activity loss limit. He will treat it as any other capital loss carryover. Installment sale of an entire interest. If you sell your entire interest in a passive activity through an installment sale, to figure the loss for the current year that is not limited by the passive activity rules, multiply your overall loss (not including losses allowed in prior years) by a fraction. The numerator (top part) of the fraction is the gain recognized in the current year, and the denominator (bottom part) is the gain remaining to be recognized as of the beginning of the year.

• Schedule D (Form 1040), Capital Gains
and Losses,

• Schedule E (Form 1040), Supplemental
Income and Loss,

• Schedule F (Form 1040), Profit or Loss
From Farming,

• Form 4797, Sales of Business Property, • Form 6252, Installment Sale Income, • Form 8582, Passive Activity Loss Limitations, and

• Form 8582–CR, Passive Activity Credit
Limitations.
Regardless of the number or complexity of passive activities you have, you should use only one Form 8582.

Example. John Ash has a total gain of $10,000 from the sale of an entire interest in a passive activity. Under the installment method he reports $2,000 of gain each year, including the year of sale. For the first year, 20% (2,000/10,000) of the losses are allowed. For the second year, 25% (2,000/8,000) of the remaining losses are allowed.
Partners and S corporation shareholders. Generally, any gain or loss on the disposition of a partnership interest must be allocated to

Example
This example shows how to report your passive activities. In this example, in addition to Form 1040, Charles and Lily use Form 8582 (to figure allowed passive activity deductions), Schedule E (to report rental activities and partnership activities), Form 4797 (to figure the gain and allowable loss from assets sold that were used in the activities), and Schedule D (to report the sale of partnership interests). Page 9

General Information
Charles and Lily are married, file a joint return, and have combined wages of $132,000 in 1998. They own interests in the following activities. They are at risk for all of their investment in the activities. They did not materially participate in any of the business activities. They actively participated in the rental real estate activities in 1998 and all prior years. Charles and Lily are not real estate professionals. 1) Activity A is a rental real estate activity. The income and expenses are reported on Schedule E. Charles and Lily's records show a loss from operations of $15,000 in 1998. Their records also show a gain of $2,776 in 1998 from the sale of section 1231 assets used in the activity. That section 1231 gain is reported in Part I of Form 4797. In 1997 they completed the Worksheets in the instructions for Form 8582 and calculated that $6,667 of Activity A's Schedule E loss for 1997 was disallowed by the passive activity rules. That loss is carried over to 1998 as a prior year unallowed Schedule E loss. 2) Activity B is a rental real estate activity. Its income and expenses are reported on Schedule E. Charles and Lily's records show a loss from operations of $11,600 in 1998. In 1997 they completed the Worksheets in the instructions for Form 8582 and calculated that $8,225 of Activity B's Schedule E loss for 1997 was disallowed by the passive activity rules. That loss is carried over to 1998 as a prior year unallowed Schedule E loss. 3) Partnership #1 holds a trade or business activity and is not a publicly traded partnership (PTP). Partnership #1 reports a $4,000 distributive share of its 1998 profits to Charles and Lily on line 1 of Schedule K–1 (Form 1065). They report that profit on Schedule E. In 1997 they completed the Worksheets in the instructions for Form 8582 and calculated that $2,600 of their distributive share of Partnership #1's 1997 loss was disallowed by the passive activity rules. That loss is carried over to 1998 as a prior year unallowed Schedule E loss. 4) Partnership #2 is a PTP that holds a trade or business activity. In 1998 Charles and Lily disposed of their entire interest in Partnership #2. They do not report that gain on Form 8582 because Partnership #2 is a PTP. They recognize a long-term capital gain of $15,300 ($25,300 selling price minus $10,000 adjusted basis), which they report on Schedule D. The partnership reports a $1,200 distributive share of its 1998 losses to them on line 1 of Schedule K–1 (Form 1065). They report that loss on Schedule E. In 1997 they followed the instructions for Form 8582 and calculated that $2,445 of their distributive share of Partnership #2's 1997 loss was disallowed by the passive activity rules. That loss is carried over and added to the $1,200 Schedule E loss. (See the discussion of PTPs in the instructions for Form 8582.) Page 10

5) Partnership #3 holds a single trade or business activity and is not a PTP. Charles and Lily sold their entire interest in partnership #3 in November 1998. They recognize a $4,000 ($15,000 selling price minus $11,000 adjusted basis) long-term capital gain, which they report on Schedule D. In 1997 they completed the Worksheets in the Form 8582 instructions and calculated that $3,000 of their distributive share of the partnership's loss for 1997 was disallowed by the passive activity rules. That loss is carried over to 1998 as a prior year unallowed Schedule E loss. Charles and Lily's distributive share of partnership losses for 1998 reported on line 1 of Schedule K–1 (Form 1065), is $6,000. 6) Partnership #4 is a limited partnership that holds a trade or business activity. Charles and Lily are limited partners who did not meet any of the material participation tests. Their distributive share of 1998 partnership loss, reported on line 1 of Schedule K–1 (Form 1065), is $2,400. In 1997 they completed the Worksheets in the Form 8582 instructions and calculated that $1,500 of their distributive share of loss for 1997 was disallowed by the passive activity rules. That loss is carried over to 1998 as a prior year unallowed Schedule E loss.

not complete Form 6198 before Form 8582. (The second part of this publication explains the at-risk rules.) Worksheet 1. Charles and Lily enter the gains and losses on Worksheet 1 for Activity A and Activity B (rental real estate activities). They enter all amounts from the activities even though they already reported the gain of $2,776 from Activity A on Form 4797, since all income or loss from these activities must be taken into account to figure the loss allowed. 1) They write “Activity A” on the first line under Name of activity. Then they enter: a) b) c) $2,776 gain in column (a) from Form 4797, line 2, column (g), ($15,000) loss in column (b) from Schedule E, line 22, column A, and ($6,667) prior year unallowed loss in column (c) from their worksheets used in 1997.

They combine the three amounts. Since the result, ($18,891), is an overall loss, they enter it in column (e). 2) Charles and Lily write “Activity B” on the second line under Name of activity. Then they enter: a) b) ($11,600) loss in column (b) from Schedule E, line 22, column B, and ($8,225) prior year unallowed loss in column (c) from their 1997 worksheets.

Step One—Completing the Tax Forms Before Figuring the Passive Activity Loss Limits
As far as they can, Charles and Lily complete the forms they usually use to report income or expenses from their activities. They enter their combined wages, $132,000, on Form 1040. They complete line 8 of Schedule D showing long-term capital gains of $15,300 from Partnership #2 and $4,000 from Partnership #3. Because Partnership #2 is a PTP, it is not entered on Form 8582. Because the disposition of Partnership #3 is a disposition of an entire interest in an activity with an overall loss ($5,000), that partnership is also not entered on Form 8582. They combine the PTP $1,200 current year loss with its $2,445 prior year loss, and also combine the Partnership #3 $6,000 current year loss with its $3,000 prior year loss, and enter the two combined amounts in column (g) on line 27 of Schedule E, Part II. They enter the $4,000 profit from Partnership #1 in column (h). Before completing Part II of Schedule E, they must complete Form 8582 to figure out how much of their losses from Partnerships #1 and #4 they can deduct. They complete Schedule E, Part I, through line 22. Since their rental activities are passive, they must complete Form 8582 to figure the deductible losses to enter on line 23. They enter the gain from the sale of the section 1231 assets of Activity A on Form 4797.

Then they combine these two figures and enter the total loss, ($19,825), in column (e). 3) They separately add columns (a), (b), and (c). a) They enter $2,776 in column (a) on the “Total” line and also on Form 8582, Part I, line 1a. They enter ($26,600) in column (b) on the “Total” line and also on Form 8582, Part I, line 1b. They enter ($14,892) in column (c) on the “Total” line and also on Form 8582, Part I, line 1c.

b)

c)

4) They combine lines 1a, 1b, and 1c, Form 8582, and put the net loss, ($38,716), on line 1d. Worksheet 2. Because Partnership #1 and Partnership #4 are nonrental passive activities, Charles and Lily enter the appropriate information on Worksheet 2, similar to the way they reported their rental activities on Worksheet 1. Then they enter the totals on Form 8582, Part I, lines 2a through 2d. Reporting income from column (d), Worksheets 1 and 2. Activities that have an overall gain in column (d) are not used any further in the calculations for Form 8582. At this point, overall gain activities should be entered on the forms or schedules that would normally be used. Charles and Lily have one activity with an overall gain ($4,000 − $2,600 = $1,400). This is Partnership #1, which is shown in Worksheet 2. They report this partnership income directly on Part II, Schedule E.

Step Two—Form 8582 and the Worksheets
Charles and Lily now complete Form 8582 and the worksheets that apply to their passive activities. Because they are at risk for all amounts invested in their activities, they do

Step Three—Completing Form 8582
Charles and Lily fill out Part II, Form 8582, to find the amount they can deduct for their net losses from real estate activities with active participation (Activities A and B). They enter all amounts as though they were positive (without brackets around losses). They then complete Part III of Form 8582. 1) They enter $38,716 on line 4 since this is the smaller of line 1d or line 3. 2) They enter $150,000 on line 5 since they are married and filing a joint return. 3) They enter $138,655, their modified adjusted gross income, on line 6. (See the instructions for Form 8582 for a discussion of modified adjusted gross income.) The $138,655 is made up of their wages, $132,000, plus their overall gain, $11,655, from the entire disposition of Partnership #2, a PTP, plus their $5,000 overall loss from the entire disposition of partnership #3. They reported on Schedule D longterm gains of $15,300 from the PTP disposition and $4,000 from the partnership #3 disposition. Also, on Schedule E they combined the PTP 1998 loss of $1,200 with its prior year loss of $2,445, and combined the Partnership #3 1998 loss of $6,000 with its prior year loss of $3,000. Netting these amounts gives them the PTP overall gain of $11,655 and the Partnership #3 overall loss of $5,000 that were used in figuring modified adjusted gross income. 4) They subtract line 6 from line 5 and enter the result, $11,345, on line 7. 5) They multiply line 7 by 50% and enter the result, $5,673, on line 8. No matter what the result, they cannot enter more than $25,000 on line 8. 6) They enter the smaller of line 4 or line 8, $5,673, on line 9. 7) They add the income on lines 1a and 2a and enter the result, $6,776, on line 10. 8) They add lines 9 and 10 and enter the result, $12,449, on line 11.

schedules the activities are reported on, Schedule E. 2) They fill in column (a) with the losses from Worksheet 1, column (e). They add up the amounts, and enter the result, $38,716, in the “Total” line without brackets. 3) They figure the ratios for column (b) by dividing each amount in column (a) by the amount on the column (a) Total line and entering the result in (b). These ratios, when added, must equal 1.00. 4) They multiply the amount from line 9, Form 8582, $5,673, by each of the ratios in Worksheet 3, column (b) and enter the results on the appropriate line in column (c). The total must equal $5,673. 5) They subtract column (c) from column (a) and enter each result in column (d).

lowed loss from each activity and must add up to $35,543.

Step Six—Using Worksheets 5 and 6
Charles and Lily now decide whether they must use Worksheet 5, Worksheet 6, or both to figure their allowed losses. If the loss from an activity entered on Worksheet 4 is reported on only one form or schedule, then Worksheet 5 is used. If an activity has a loss that is reported on two or more schedules or forms (for example, a loss that must be reported partly on Schedule C and partly on Form 4797), Worksheet 6 is used. Charles and Lily determine that the activities they entered on Worksheet 4 should go on Worksheet 5 since the losses are reported on Schedule E only. (Worksheet 6 is not illustrated.) Worksheet 5. They fill out Worksheet 5 with the activities from Worksheet 4. 1) They enter the names of the activities and the schedules to be used in the two left columns of Worksheet 5. 2) In column (a), they enter the total loss for each activity. These losses include the current year loss plus the prior year unallowed loss. They find these amounts by adding columns (b) and (c) on Worksheets 1 and 2. 3) In column (b), they enter the unallowed loss for each activity already figured in Worksheet 4, column (c). They must save this information to use next year in figuring their passive losses. 4) In column (c), they figure their allowed losses for 1998 by subtracting their unallowed losses, column (b), from their total losses, column (a). These allowed losses are entered on the appropriate schedules. Reporting allowed losses. Charles and Lily enter their allowed losses from Activities A and B on Schedule E, Part I, line 23, because these are rental properties. They report their allowed loss from Partnership #4 on Schedule E, Part II.

Step Five—Completing Worksheet 4
Worksheet 4 must be completed if there is an overall loss in column (e) of Worksheet 2 or losses in column (d) of Worksheet 3 (or column (e) of Worksheet 1 if Worksheet 3 was not needed). This worksheet allocates the unallowed loss among the activities with an overall loss. Charles and Lily fill out Worksheet 4 with the activities from Worksheet 3 and the one activity showing a loss in Worksheet 2, column (e). They fill in the names of the activities and the schedules or forms each will be reported on in the two left columns of Worksheet 4. 1) In column (a), they enter the losses from Worksheet 2, column (e) and Worksheet 3, column (d). These losses are entered as positive numbers, not in brackets. They add the numbers and enter the total, $36,943, on the Total line. 2) They divide each of the losses in column (a) by the amount on the column (a) Total line, and enter each result in column (b). These numbers must also add up to 1.00. 3) Now they use the computation worksheet for column (c) (see Worksheet 4 in the instructions for Form 8582) to figure the unallowed loss to allocate in column (c). a) On line A of the computation worksheet, they enter the amount from line 3 of Form 8582, $41,216, as a positive number. On line B, they enter the amount from line 9 of Form 8582, $5,673. They subtract line B from line A and enter the result, $35,543, on line C. This is the total unallowed loss.

Step Four—Completing Worksheet 3
Charles and Lily must complete Worksheet 3 since they have an activity with an overall loss in column (e) of Worksheet 1 and an amount on line 9 of Form 8582. This worksheet allocates the amount on line 9 (their special allowance for active participation rental real estate activities) between Activity A and Activity B. 1) In the two left columns, they write the names of the activities, A and B, and the

Step Seven—Finishing the Reporting of the Passive Activities
Charles and Lily summarize the entries on Schedule E, Schedule D, and Form 4797, and enter the amounts on the appropriate lines of their Form 1040. They enter: 1) The total Schedule D gain, $22,076, on line 13. 2) The Schedule E loss, ($21,094), on line 17. Charles and Lily are now able to complete their return, having limited their losses from their passive activities as required.

b) c)

They multiply line C, $35,543, by each of the ratios in column (b) and enter the results in column (c). These amounts are the unal-

Page 11

1040
L A B E L H E R E

Form

Department of the Treasury—Internal Revenue Service

U.S. Individual Income Tax Return
Your first name and initial

1998
Woods Woods

IRS Use Only—Do not write or staple in this space.

For the year Jan. 1–Dec. 31, 1998, or other tax year beginning

, 1998, ending

Label
(See instructions on page 18.) Use the IRS label. Otherwise, please print or type.

Last name

, 19 OMB No. 1545-0074 Your social security number

Charles
If a joint return, spouse’s first name and initial Last name

123 567
Apt. no.

00 00

4567 1234

Spouse’s social security number

Lily 6925 Country Road

Home address (number and street). If you have a P.O. box, see page 18.

IMPORTANT!
You must enter your SSN(s) above. Yes No
Note: Checking “Yes” will not change your tax or reduce your refund.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 18.

Presidential Election Campaign (See page 18.)

Anytown, VA 22306
Do you want $3 to go to this fund? If a joint return, does your spouse want $3 to go to this fund? 1 2 3 4 5 6a Single Married filing joint return (even if only one had income) Married filing separate return. Enter spouse’s social security no. above and full name here.

Filing Status
Check only one box.

Head of household (with qualifying person). (See page 18.) If the qualifying person is a child but not your dependent, enter this child’s name here. Qualifying widow(er) with dependent child (year spouse died 19 ). (See page 18.) Yourself. If your parent (or someone else) can claim you as a dependent on his or her tax return, do not check box 6a
(2) Dependent’s social security number (3) Dependent’s relationship to you (4) if qualifying child for child tax credit (see page 19) No. of boxes checked on 6a and 6b No. of your children on 6c who: ● lived with you ● did not live with you due to divorce or separation (see page 19) Dependents on 6c not entered above Add numbers entered on lines above

Exemptions

2

b Spouse c Dependents:
(1) First name Last name

If more than six dependents, see page 19.

d Total number of exemptions claimed

2

Income
Attach Copy B of your Forms W-2, W-2G, and 1099-R here. If you did not get a W-2, see page 20. Enclose, but do not staple, any payment. Also, please use Form 1040-V.

7

Wages, salaries, tips, etc. Attach Form(s) W-2 b Tax-exempt interest. DO NOT include on line 8a 8b

7 8a 9 10 11 12 13 14 b Taxable amount (see page 22) b Taxable amount (see page 22) 15b 16b 17 18 19 20b 21 22

132,000

8a Taxable interest. Attach Schedule B if required 9 10 11 12 13 14 15a 16a 17 18 19 20a 21 22 Ordinary dividends. Attach Schedule B if required Taxable refunds, credits, or offsets of state and local income taxes (see page 21) Alimony received Business income or (loss). Attach Schedule C or C-EZ Capital gain or (loss). Attach Schedule D Other gains or (losses). Attach Form 4797 15a Total IRA distributions Total pensions and annuities 16a

22,076

Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E Farm income or (loss). Attach Schedule F Unemployment compensation 20a Social security benefits b Taxable amount (see page 24) Other income. List type and amount—see page 24 Add the amounts in the far right column for lines 7 through 21. This is your total income 23 24 25 26 27 28 29 30 Student loan interest deduction (see page 27) Medical savings account deduction. Attach Form 8853 Moving expenses. Attach Form 3903 One-half of self-employment tax. Attach Schedule SE Self-employed health insurance deduction (see page 28) Keogh and self-employed SEP and SIMPLE plans Penalty on early withdrawal of savings

(21,094)

132,982

Adjusted Gross Income
If line 33 is under $30,095 (under $10,030 if a child did not live with you), see EIC inst. on page 36.

23 24 25 26 27 28 29 30 31a 32 33

IRA deduction (see page 25)

31a Alimony paid b Recipient’s SSN Add lines 23 through 31a Subtract line 32 from line 22. This is your adjusted gross income
Cat. No. 11320B

32 33
Form

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 51.

132,982 1040

(1998)

Page 12

SCHEDULE D (Form 1040)
Department of the Treasury Internal Revenue Service

Capital Gains and Losses
Attach to Form 1040. See Instructions for Schedule D (Form 1040). Use Schedule D-1 for more space to list transactions for lines 1 and 8.

OMB No. 1545-0074

Attachment Sequence No.

1998
12 4567 00

Name(s) shown on Form 1040

Your social security number

Part I

Charles and Lily Woods Short-Term Capital Gains and Losses—Assets Held One Year or Less
(b) Date acquired (Mo., day, yr.) (c) Date sold (Mo., day, yr.) (d) Sales price (see page D-6) (e) Cost or other basis (see page D-6) (f) GAIN or (LOSS) Subtract (e) from (d)

123

(a) Description of property (Example: 100 sh. XYZ Co.)

1

2 3 4 5 6 7

Enter your short-term totals, if any, from 2 Schedule D-1, line 2 Total short-term sales price amounts. 3 Add column (d) of lines 1 and 2 Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684, 6781, and 8824 Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 Short-term capital loss carryover. Enter the amount, if any, from line 8 of your 1997 Capital Loss Carryover Worksheet Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)
(b) Date acquired (Mo., day, yr.) (c) Date sold (Mo., day, yr.) (d) Sales price (see page D-6)

4 5 6 7
(f) GAIN or (LOSS) Subtract (e) from (d) (g) 28% RATE GAIN or (LOSS) (see instr. below)

(

)

Part II

Long-Term Capital Gains and Losses—Assets Held More Than One Year
(e) Cost or other basis (see page D-6)

(a) Description of property (Example: 100 sh. XYZ Co.)

*

8

Partnership #2 (entire disposition of passive activity) Partnership #3 (entire disposition of passive activity)

12-2-91 12-15-92

12-4-98 11-18-98

25,300 15,000

10,000 11,000

15,300 4,000

9 10 11 12

Enter your long-term totals, if any, from Schedule D-1, line 9 Total long-term sales price amounts. Add column (d) of lines 8 and 9

9 10 11 12 13 14 ( 15 16 ) ( )

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or (loss) from Forms 4684, 6781, and 8824 Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 Capital gain distributions. See page D-2 Long-term capital loss carryover. Enter in both columns (f) and (g) the amount, if any, from line 13 of your 1997 Capital Loss Carryover Worksheet Combine lines 8 through 14 in column (g) Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f) Next: Go to Part III on the back.

2,776

13 14

15 16

22,076

* 28% Rate Gain or Loss includes all “collectibles gains and losses” (as defined on page D-6) and up to 50% of the eligible gain
on qualified small business stock (see page D-5).
For Paperwork Reduction Act Notice, see Form 1040 instructions.
Cat. No. 11338H

Schedule D (Form 1040) 1998

Page 13

SCHEDULE E (Form 1040)
Department of the Treasury Internal Revenue Service

Supplemental Income and Loss
(From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.)
Attach to Form 1040 or Form 1041. See Instructions for Schedule E (Form 1040).

OMB No. 1545-0074

Attachment Sequence No.

1998
13 00 4567

Name(s) shown on return

Your social security number

Part I

Note: Report income and expenses from your business of renting personal property on Schedule C or C-EZ (see page E-1). Report farm rental income or loss from Form 4835 on page 2, line 39.

Charles and Lily Woods Income or Loss From Rental Real Estate and Royalties

123

1 Show the kind and location of each rental real estate property: A B C

Brick Duplex -Condo --

6924 -- 26 Country Road Anytown, VA 22306 6915 Country Road Anytown, VA 22306

2 For each rental real estate property listed on line 1, did you or your family use it during the tax year for personal purposes for more than the greater of: ● 14 days, or ● 10% of the total days rented at fair rental value? (See page E-1.)

Yes No A B C Totals

Income:
3 4 Rents received Royalties received 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

A

Properties B

C

(Add columns A, B, and C.)

25,000 600 1,500 1,200 2,000 1,000

8,300 210 525 420 700 390

3 4

33,300

Expenses:
5 Advertising 6 Auto and travel (see page E-2) 7 Cleaning and maintenance 8 Commissions 9 Insurance 10 Legal and other professional fees 11 Management fees 12 Mortgage interest paid to banks, etc. (see page E-2) 13 Other interest 14 Repairs 15 Supplies 16 Taxes 17 Utilities Wages and 18 Other (list)

9,000 700 600 2,000 2,400 9,000

8,510 245 210 700 840 3,150

12

17,510

salaries
18

19 20 21 22

Add lines 5 through 18

19

30,000

15,900

19

45,900 14,000

23

24 25 26

Depreciation expense or depletion 4,000 10,000 20 20 (see page E-3) 19,900 40,000 21 Total expenses. Add lines 19 and 20 Income or (loss) from rental real estate or royalty properties. Subtract line 21 from line 3 (rents) or line 4 (royalties). If the result is a (loss), see page E-3 to find out (11,600) (15,000) 22 if you must file Form 6198 Deductible rental real estate loss. Caution: Your rental real estate loss on line 22 may be limited. See page E-3 to find out if you must file Form 8582. Real estate professionals must complete line 3,546 6,155 ) ( ) ( ) 23 ( 42 on page 2 24 Income. Add positive amounts shown on line 22. Do not include any losses 25 ( Losses. Add royalty losses from line 22 and rental real estate losses from line 23. Enter total losses here Total rental real estate and royalty income or (loss). Combine lines 24 and 25. Enter the result here. If Parts II, III, IV, and line 39 on page 2 do not apply to you, also enter this amount on Form 1040, line 17. Otherwise, include this amount in the total on line 40 on page 2 26
Cat. No. 11344L

9,701 (9,701)

)

For Paperwork Reduction Act Notice, see Form 1040 instructions.

Schedule E (Form 1040) 1998

Page 14

Schedule E (Form 1040) 1998 Name(s) shown on return. Do not enter name and social security number if shown on other side.

Attachment Sequence No.

13

Page

2

Your social security number

Note: If you report amounts from far ming or fishing on Schedule E, you must enter your gross income from those activities on line 41 below. Real estate professionals must complete line 42 below.

Part II
27 A B C D E

Income or Loss From Partnerships and S Corporations
(a) Name

Note: If you report a loss from an at-risk activity, you MUST check either column (e) or (f) on line 27 to describe your investment in the activity. See page E-5. If you check column (f), you must attach Form 6198.
(b) Enter P for partnership; S for S corporation (c) Check if foreign partnership (d) Employer identification number Investment At Risk? (e) All is (f) Some is at risk not at risk

Partnership Partnership Partnership Partnership

#2 #3 #1 #4

(entire disposition of passive activity) (entire disposition of passive activity)

P P P P

10-1672810 10-9876243 10-5566650 10-7435837
Nonpassive Income and Loss

Passive Income and Loss
(g) Passive loss allowed (attach Form 8582 if required) (h) Passive income from Schedule K–1 (i) Nonpassive loss from Schedule K–1

(j) Section 179 expense deduction from Form 4562

(k) Nonpassive income from Schedule K–1

PTP (3,645) A From (9,000) B (2,600) 4,000 C (148) D E 4,000 28a Totals (15,393) b Totals 29 Add columns (h) and (k) of line 28a 30 Add columns (g), (i), and (j) of line 28b 31 Total partnership and S corporation income or (loss). Combine lines 29 and 30. Enter the result here and include in the total on line 40 below Part III
32 A B Passive Income and Loss
(c) Passive deduction or loss allowed (attach Form 8582 if required) (d) Passive income from Schedule K–1

29 30 ( 31

4,000 15,393 (11,393)

)

Income or Loss From Estates and Trusts
(a) Name (b) Employer identification number

Nonpassive Income and Loss
(e) Deduction or loss from Schedule K–1 (f) Other income from Schedule K–1

A B 33a b 34 35 36 Totals Totals Add columns (d) and (f) of line 33a Add columns (c) and (e) of line 33b Total estate and trust income or (loss). Combine lines 34 and 35. Enter the result here and include in the total on line 40 below
(a) Name (b) Employer identification number (c) Excess inclusion from Schedules Q, line 2c (see page E-6) (d) Taxable income (net loss) from Schedules Q, line 1b

34 35 ( 36
(e) Income from Schedules Q, line 3b

)

Part IV
37 38

Income or Loss From Real Estate Mortgage Investment Conduits (REMICs)—Residual Holder

Combine columns (d) and (e) only. Enter the result here and include in the total on line 40 below

38 39 40

Part V

Summary (21,094)

39 Net farm rental income or (loss) from Form 4835. Also, complete line 41 below 40 TOTAL income or (loss). Combine lines 26, 31, 36, 38, and 39. Enter the result here and on Form 1040, line 17 41 Reconciliation of Farming and Fishing Income. Enter your gross farming and fishing income reported on Form 4835, line 7; Schedule K-1 (Form 1065), line 15b; Schedule K-1 (Form 1120S), line 23; and 41 Schedule K-1 (Form 1041), line 14 (see page E-6) Reconciliation for Real Estate Professionals. If you were a real estate professional (see page E-4), enter the net income or (loss) you reported anywhere on Form 1040 from all rental real estate activities in which you materially participated under the passive activity loss rules 42

42

Page 15

Form

4797

Sales of Business Property
(Also Involuntary Conversions and Recapture Amounts Under Sections 179 and 280F(b)(2))
Attach to your tax return. See separate instructions.

OMB No. 1545-0184

1998
Attachment Sequence No. Identifying number

Department of the Treasury Internal Revenue Service (99)

27

Name(s) shown on return

Charles and Lily Woods
1

123-00-4567
1

Enter here the gross proceeds from the sale or exchange of real estate reported to you for 1998 on Form(s) 1099-S (or a substitute statement) that you will be including on line 2, 10, or 20

Part I

Sales or Exchanges of Property Used in a Trade or Business and Involuntary Conversions From Other Than Casualty or Theft—Property Held More Than 1 Year
(b) Date acquired (mo., day, yr.) (c) Date sold (mo., day, yr.) (d) Gross sales price (e) Depreciation allowed or allowable since acquisition (f) Cost or other (g) GAIN or (LOSS) (h) 28% RATE GAIN basis, plus Subtract (f) from or (LOSS) improvements and the sum of (d) (see instr. below) expense of sale and (e)

(a) Description of property

*

2

Land from Activity A

1-4-91

1-5-98

6,000

3,224

2,776 (From passive activity)

3 4 5 6 7

Gain, if any, from Form 4684, line 39 Section 1231 gain from installment sales from Form 6252, line 26 or 37 Section 1231 gain or (loss) from like-kind exchanges from Form 8824 Gain, if any, from line 32, from other than casualty or theft Combine lines 2 through 6 in columns (g) and (h). Enter gain or (loss) here, and on the appropriate line as follows: Partnerships—Report the gain or (loss) following the instructions for Form 1065, Schedule K, line 6. Skip lines 8, 9, 11, and 12 below. S corporations—Report the gain or (loss) following the instructions for Form 1120S, Schedule K, lines 5 and 6. Skip lines 8, 9, 11, and 12 below, unless line 7, column (g) is a gain and the S corporation is subject to the capital gains tax. All others—If line 7, column (g) is zero or a loss, enter that amount on line 11 below and skip lines 8 and 9. If line 7, column (g) is a gain and you did not have any prior year section 1231 losses, or they were recaptured in an earlier year, enter the gain or (loss) in each column as a long-term capital gain or (loss) on Schedule D and skip lines 8, 9, and 12 below. Nonrecaptured net section 1231 losses from prior years (see instructions)

3 4 5 6 7

2,776

8 9

8

*

Subtract line 8 from line 7. For column (g) only, if the result is zero or less, enter -0-. Enter here 9 and on the appropriate line(s) as follows (see instructions): S corporations—Enter only the gain in column (g) on Schedule D (Form 1120S), line 14, and skip lines 11 and 12 below. All others—If line 9, column (g) is zero, enter the gain from line 7, column (g) on line 12 below. If line 9, column (g) is more than zero, enter the amount from line 8, column (g) on line 12 below, and enter the gain or (loss) in each column of line 9 as a long-term capital gain or (loss) on Schedule D. Corporations (other than S corporations) should not complete column (h). Partnerships and S corporations must complete column (h). All others must complete column (h) only if line 7, column (g), is a gain. Use column (h) only to report pre-1998 28% rate gain (or loss) from a 1997-98 fiscal year partnership or S corporation.

Part II
10

Ordinary Gains and Losses

Ordinary gains and losses not included on lines 11 through 17 (include property held 1 year or less):

11 12 13 14 15 16 17 18

Loss, if any, from line 7, column (g) Gain, if any, from line 7, column (g) or amount from line 8, column (g) if applicable Gain, if any, from line 31 Net gain or (loss) from Form 4684, lines 31 and 38a Ordinary gain from installment sales from Form 6252, line 25 or 36 Ordinary gain or (loss) from like-kind exchanges from Form 8824 Recapture of section 179 expense deduction for partners and S corporation shareholders from property dispositions by partnerships and S corporations (see instructions) Combine lines 10 through 17 in column (g). Enter gain or (loss) here, and on the appropriate line as follows: a For all except individual returns: Enter the gain or (loss) from line 18 on the return being filed. b For individual returns: (1) If the loss on line 11 includes a loss from Form 4684, line 35, column (b)(ii), enter that part of the loss here. Enter the part of the loss from income-producing property on Schedule A (Form 1040), line 27, and the part of the loss from property used as an employee on Schedule A (Form 1040), line 22. Identify as from “Form 4797, line 18b(1).” See instructions (2) Redetermine the gain or (loss) on line 18, excluding the loss, if any, on line 18b(1). Enter here and on Form 1040, line 14

11 12 13 14 15 16 17 18

(

)

18b(1) 18b(2)
Form

For Paperwork Reduction Act Notice, see separate instructions.

Cat. No. 13086I

4797

(1998)

Page 16

Form

8582

Passive Activity Loss Limitations
See separate instructions. Attach to Form 1040 or Form 1041.

OMB No. 1545-1008

Department of the Treasury Internal Revenue Service

Attachment Sequence No.

1998
88

Name(s) shown on return

Identifying number

Part I

Charles and Lily Woods 1998 Passive Activity Loss
Caution: See the instructions for Worksheets 1 and 2 on page 7 before completing Part I.

123-00-4567

Rental Real Estate Activities With Active Participation (For the definition of active participation see Active Participation in a Rental Real Estate Activity on page 3 of the instructions.) 1a Activities with net income (enter the amount from Worksheet 1, column (a)) b Activities with net loss (enter the amount from Worksheet 1, column (b)) c Prior years unallowed losses (enter the amount from Worksheet 1, column (c)) d Combine lines 1a, 1b, and 1c All Other Passive Activities 2a Activities with net income (enter the amount from Worksheet 2, column (a)) b Activities with net loss (enter the amount from Worksheet 2, column (b)) c Prior years unallowed losses (enter the amount from Worksheet 2, column (c)) d Combine lines 2a, 2b, and 2c 3

1a 1b ( 1c (

2,776 26,600 14,892
) ) 1d

(38,716)

2a 2b ( 2c (

4,000 2,400 4,100
) ) 2d

(2,500)

Combine lines 1d and 2d. If the result is net income or zero, all losses are allowed, including any prior year unallowed losses entered on line 1c or 2c. Do not complete Form 8582. Take the losses to the form or schedule you normally report them on. If this line and line 1d are losses, go to line 4. Otherwise, enter -0- on line 9 and go to line 10

3

(41,216)

Part II

Special Allowance for Rental Real Estate With Active Participation
Note: Enter all numbers in Part II as positive amounts. See page 7 of the instructions for examples.

4 5 6

Enter the smaller of the loss on line 1d or the loss on line 3 Enter $150,000. If married filing separately, see page 7 of the 150,000 5 instructions Enter modified adjusted gross income, but not less than zero (see 138,655 6 page 7 of the instructions) Note: If line 6 is equal to or greater than line 5, skip lines 7 and 8, enter -0- on line 9, and then go to line 10. Otherwise, go to line 7. 11,345 7 Subtract line 6 from line 5 Multiply line 7 by 50% (.5). Do not enter more than $25,000. If married filing separately, see page 9 of the instructions Enter the smaller of line 4 or line 8

4

38,716

7 8

8 9

5,673 5,673

9

Part III
10 11

Total Losses Allowed
10

Add the income, if any, on lines 1a and 2a and enter the total Total losses allowed from all passive activities for 1998. Add lines 9 and 10. See page 9 of the instructions to find out how to report the losses on your tax return
Cat. No. 63704F

6,776

11

12,449
Form

For Paperwork Reduction Act Notice, see separate instructions.

8582

(1998)

Page 17

Form 8582 (1998)

Page

2

Caution: The worksheets are not required to be filed with your tax retur n and may be detached before filing For m 8582. Keep a copy of the worksheets for your records. Worksheet 1—For Form 8582, Lines 1a, 1b, and 1c (See page 7 of the instructions.)
Current year Name of activity (a) Net income (line 1a) (b) Net loss (line 1b) (c) Unallowed loss (line 1c) (d) Gain (e) Loss Prior years Overall gain or loss

Activity A Activity B

2,776

(15,000) (11,600)

(6,667) (8,225)

(18,891) (19,825)

Total. Enter on Form 8582, lines 1a, 1b, and 1c

2,776

(26,600)

(14,892)

Worksheet 2—For Form 8582, Lines 2a, 2b, and 2c (See page 7 of the instructions.)
Current year Name of activity (a) Net income (line 2a) (b) Net loss (line 2b) (c) Unallowed loss (line 2c) (d) Gain (e) Loss Prior years Overall gain or loss

Partnership #1 Partnership #4

4,000 (2,400)

(2,600) (1,500)

1,400 (3,900)

Total. Enter on Form 8582, lines 2a, 2b, and 2c

4,000
Form or schedule to be reported on

(2,400)

(4,100)
(c) Special allowance (d) Subtract column (c) from column (a)

Worksheet 3—Use this worksheet if an amount is shown on Form 8582, line 9 (See page 8 of the instructions.)
Name of activity
(a) Loss (b) Ratio

Activity A Activity B

Sch. E Sch. E

18,891 19,825

.487938 .512062

2,768 2,905

16,123 16,920

Total Name of activity

38,716
Form or schedule to be reported on

1.00
(a) Loss

5,673

33,043

Worksheet 4—Allocation of Unallowed Losses (See page 8 of the instructions.)
(b) Ratio (c) Unallowed loss

Activity A Activity B Partnership #4

Sch. E Sch. E Sch. E

16,123 16,920 3,900

.436429 .458003 .105568

15,512 16,279 3,752

Total

36,943
Name of activity
Form or schedule to be reported on

1.00

35,543

Worksheet 5—Allowed Losses (See page 8 of the instructions.)
(a) Loss (b) Unallowed loss (c) Allowed loss

Activity A Activity B Partnership #4

Sch. E Sch. E Sch. E

21,667 19,825 3,900

15,512 16,279 3,752

6,155 3,546 148

Total

45,392

35,543

9,849

Page 18

At-Risk Limits
The at-risk rules limit your losses from most activities to your amount at risk in the activity. You treat any loss from an activity that is not allowed in a tax year because of the at-risk limits as a deduction for the activity in the next tax year. If your losses in an at-risk activity are allowed, they are subject to recapture in later years if your amount at risk is reduced below zero.

1) Stock owned directly or indirectly by or for a corporation, partnership, estate, or trust is considered owned proportionately by its shareholders, partners, or beneficiaries. 2) An individual is considered to own the stock owned directly or indirectly by or for his or her family. Family includes only brothers and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants. 3) If a person holds an option to buy stock, he or she is considered to be the owner of that stock. 4) When applying rule (1) or (2), stock considered owned by a person under rule (1) or (3) is treated as actually owned by that person. Stock considered owned by an individual under rule (2) is not treated as owned by the individual for again applying rule (2) to consider another the owner of that stock. 5) Stock that may be considered owned by an individual under either rule (2) or (3) is considered owned by the individual under rule (3).

leasing, the equipment leasing is treated as a separate activity not covered by the at-risk rules. A closely held corporation is actively engaged in equipment leasing if 50% or more of its gross receipts for the tax year are from equipment leasing. Equipment leasing. Equipment leasing means the leasing, purchasing, servicing, and selling of equipment that is section 1245 property. Section 1245 property includes any depreciable or amortizable property that is: 1) Personal property, 2) Other tangible property (other than a building or its structural components) that is: a) Used in manufacturing, production, or extraction or in furnishing transportation, communications, electrical energy, gas, water, or sewage disposal, A research facility used for the activities in (a), or A bulk storage facility used for the activities in (a),

CAUTION

!

You must apply the at-risk rules before the passive activity rules discussed in the first part of this publi-

cation.

Loss defined. A loss is the excess of allowable deductions from the activity for the year (including depreciation or amortization allowed or allowable and disregarding the atrisk limits) over income received or accrued from that activity during the year. Income does not include income from the recapture of previous losses (discussed later under Recapture Rule). Form 6198. Use Form 6198 to figure how much loss from an activity you can deduct. You must file Form 6198 with your tax return if: 1) You have a loss from any part of an activity that is covered by the at-risk rules, and 2) You are not at risk for some of your investment in the activity. Loss limits for partners and S corporation shareholders. Three separate limits apply to a partner's or shareholder's distributive share of a loss from a partnership or S corporation. The limits determine the amount of the loss each partner or shareholder can deduct on his or her own return. These limits and the order in which they apply are: 1) The adjusted basis of: a) b) The partner's partnership interest, or The shareholder's stock plus any loans the shareholder makes to the corporation,

b) c)

3) A single purpose agricultural or horticultural structure, or 4) A storage facility (other than a building or its structural components) used for the distribution of petroleum. However, equipment leasing does not include leases of master sound recordings and similar contractual arrangements for tangible or intangible assets associated with literary, artistic, or musical properties, such as books, lithographs of artwork, or musical tapes. A closely held corporation cannot exclude these leasing activities from the at-risk rules nor count them as equipment leasing for the gross receipts test. The equipment leasing exclusion is not available for leasing activities related to other at-risk activities, such as motion picture films and video tapes, farming, oil and gas properties, and geothermal deposits. If a closely held corporation leases a video tape, it cannot exclude this leasing activity from the at-risk rules under the equipment leasing exclusion. Controlled group of corporations. A controlled group of corporations is subject to special rules for the equipment leasing exclusion. See section 465(c) of the Internal Revenue Code. Special exception for qualified corporations. A qualified corporation is not subject to the at-risk limits for any qualifying business carried on by the corporation. Each qualifying business is treated as a separate activity. A qualified corporation is a closely held corporation, defined earlier under Who Is Affected?, that is not: 1) A personal holding company, 2) A foreign personal holding company, or 3) A personal service corporation (defined in section 269A(b) of the Internal Revenue Code, but determined by substituting 5% for 10%).

Activities Covered by the At-Risk Rules
If you are involved in one of the following activities as a trade or business or for the production of income, you are subject to the atrisk rules. 1) Farming. 2) Exploring for, or exploiting, oil and gas. 3) Holding, producing, or distributing motion picture films or video tapes. 4) Equipment leasing, that is, leasing section 1245 property, including personal property and certain other tangible property that is depreciable or amortizable. See Equipment leasing, later. 5) Exploring for, or exploiting, geothermal deposits (for wells started after September 1978). 6) Any other activity not included in (1) through (5) that is carried on as a trade or business or for the production of income. Exception for holding real property placed in service before 1987. The at-risk rules do not apply to the holding of real property placed in service before 1987. They also do not apply to the holding of an interest acquired before 1987 in a pass-through entity engaged in holding real property placed in service before 1987. This exception does not apply to holding mineral property. Personal property and services that are incidental to making real property available as living accommodations are included in the activity of holding real property. For example, making personal property, such as furniture, and services available when renting a hotel or motel room or a furnished apartment is considered incidental to making real property available as living accommodations. Exception for equipment leasing by a closely held corporation. If a closely held corporation is actively engaged in equipment

2) The at-risk rules, and 3) The passive activity rules. See Limits on Losses in Publication 541, and Limitations on Losses, Deductions, and Credits in Shareholder's Instructions for Schedule K–1 (Form 1120S).

Who Is Affected?
The at-risk limits apply to individuals and to certain closely held corporations (other than S corporations). Closely held corporation. For the at-risk rules, a corporation is a closely held corporation if at any time during the last half of the tax year, more than 50% in value of its outstanding stock is owned directly or indirectly by or for five or fewer individuals. To figure if more than 50% in value of the stock is owned by five or fewer individuals, apply the following rules.

Qualifying business. A qualifying business is any active business if all of the following apply.
1) During the entire 12-month period ending on the last day of the tax year, the corporation had at least: Page 19

a)

One full-time employee whose services were in the active management of the business, and Three full-time nonowner employees whose services were directly related to the business. A nonowner employee does not own more than 5% in value of the outstanding stock of the corporation at any time during the tax year. (The rules for constructive ownership of stock in section 318 of the Internal Revenue Code apply. However, in applying these rules, an owner of 5% or more, rather than 50% or more, of the value of a corporation's stock is considered to own a proportionate share of any stock owned by the corporation.)

who is an independent contractor rather than an employee. Partners and S corporation shareholders. Partners or shareholders may aggregate certain activities their partnership or S corporation engages in. These activities are: 1) Films and video tapes, 2) Farms, 3) Oil and gas properties, and 4) Geothermal properties. For example, to apply the at-risk rules for 1998, partners and S corporation shareholders can treat all of the partnership's or S corporation's films and video tapes as one activity.

Related persons. clude:

Related persons in-

b)

1) Members of the family, but only brothers and sisters (both whole- and half-blood), spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.), 2) Two corporations that are members of the same controlled group of corporations determined by applying a 10% ownership test, 3) The fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts, 4) Certain educational or charitable organizations and a person who directly or indirectly controls one of these organizations, 5) A corporation and an individual who owns directly or indirectly more than 10% of the value of the outstanding stock of the corporation, 6) A trust fiduciary and a corporation of which more than 10% in value of the outstanding stock is owned directly or indirectly by or for the trust or by or for the grantor of the trust, 7) The grantor and fiduciary, or the fiduciary and beneficiary, of any trust, 8) A corporation and a partnership if the same persons own over 10% in value of the outstanding stock of the corporation and more than 10% of the capital interest or the profits interest in the partnership, 9) Two S corporations if the same persons own more than 10% in value of the outstanding stock of each corporation, 10) An S corporation and a regular corporation if the same persons own more than 10% in value of the outstanding stock of each corporation, 11) A partnership and a person who owns directly or indirectly more than 10% of the capital or profits of the partnership, 12) Two partnerships if the same persons directly or indirectly own more than 10% of the capital or profits of each, 13) Two persons who are engaged in business under common control, and 14) For tax years beginning after August 5, 1997, an executor of an estate and a beneficiary of that estate. To determine the direct or indirect ownership of the outstanding stock of a corporation, apply the following rules. 1) Stock owned directly or indirectly by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. 2) Stock owned directly or indirectly by or for an individual's family is considered owned by the individual. The family of an individual includes only brothers and sisters (both whole- and half-blood), a spouse, ancestors, and lineal descendants. 3) Any stock in a corporation owned by an individual (other than by applying rule

2) Deductions due to the business that are allowable to the corporation as business expenses and as contributions to certain employee benefit plans for the tax year exceed 15% of the gross income from the business. 3) The business is not an excluded business. Generally, an excluded business involves leasing section 1245 equipment, discussed earlier under Equipment leasing, and any business involving the use, exploitation, sale, lease, or other disposition of master sound recordings, motion picture films, video tapes, or tangible or intangible assets associated with literary, artistic, musical, or similar properties.

At-Risk Amounts
You are at risk in any activity for: 1) The money and adjusted basis of property you contribute to the activity, and 2) Amounts you borrow for use in the activity if: a) b) You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan.

Separation of Activities
Generally, you treat your activity involving each film or video tape, item of leased section 1245 equipment, farm, oil and gas property, or geothermal property as a separate activity. In addition, each activity for the production of income that is not a trade or business is treated as a separate activity. Leasing by a partnership or S corporation. For a partnership or S corporation, treat all leasing of section 1245 property that is placed in service in any tax year of the partnership or S corporation as one activity.

Amounts borrowed. You are at risk for amounts borrowed to use in the activity if you are personally liable for repayment. You are also at risk if the amounts borrowed are secured by property other than property used in the activity. In this case, the amount considered at risk is the net fair market value of your interest in the pledged property. The net fair market value of property is its fair market value (determined on the date the property is pledged) less any prior (or superior) claims to which it is subject. However, no property will be taken into account as security if it is directly or indirectly financed by debt that is secured by property you contributed to the activity.

Aggregation of Activities
You treat activities that are a trade or business and that are not required to be treated as separate activities as one activity if: 1) You actively participate in the management of the trade or business, or 2) The trade or business is carried on by a partnership or S corporation and 65% or more of its losses for the tax year are allocable to persons who actively participate in the management of the trade or business. Active participation depends on all the facts and circumstances. Factors that indicate active participation include making decisions involving the operation or management of the activity, performing services for the activity, and hiring and discharging employees. Factors that indicate a lack of active participation include lack of control in managing and operating the activity, having authority only to discharge the manager of the activity, and having a manager of the activity Page 20

If you borrow money to finance a contribution to an activity, you cannot CAUTION increase your amount at risk by the contribution and the amount borrowed to finance the contribution. You may increase your at-risk amount only once.

!

Certain borrowed amounts excluded. Even if you are personally liable for the repayment of a borrowed amount or you secure a borrowed amount with property other than property used in the activity, you are not considered at risk if you borrowed the money from a person having an interest in the activity (other than as a creditor) or from someone related to a person (other than you) having an interest in the activity. This does not apply to:
1) Amounts borrowed by a corporation from its shareholders, or 2) An activity described in (6) under Activities Covered by the At-Risk Rules, earlier.

(2)) is considered owned directly or indirectly by the individual's partner. 4) When applying rule (1), (2), or (3), stock considered owned by a person under rule (1) is treated as actually owned by that person. But if a person constructively owns stock because of rule (2) or (3), he or she does not own the stock for purposes of applying either rule (2) or (3) to make another person the constructive owner of the same stock. Effect of government price support programs. To apply the at-risk rules to farming operations, a government target price program (such as provided by the Agriculture and Consumer Protection Act of 1973) or other government price support programs for a product that you grow does not, without agreements limiting your costs, reduce the amount you have at risk. Effect of increasing amounts at risk in subsequent years. To apply the at-risk limits, any loss that is allowable in a particular year reduces your at-risk investment (but not below zero) as of the beginning of the next tax year and in all succeeding tax years for that activity. If you have a loss that is more than your at-risk amount, the loss disallowed will not be allowed in later years unless you increase your at-risk amount. Losses that are suspended because they are greater than your investment that is at risk are treated as a deduction for the activity in the following year. Consequently, if your amount at risk increases in later years, you may deduct previously suspended losses to the extent that the increases in your amount at risk exceed your losses in later years. However, your deduction of suspended losses may be limited by the passive loss rules.

1) Borrowed by you in connection with the activity of holding real property, 2) Secured by real property used in the activity, 3) Not convertible from a debt obligation to an ownership interest, and 4) Loaned or guaranteed by any federal, state, or local government, or borrowed by you from a qualified person.

dollar amount per head. Under such “stop loss” orders, the investor is at risk only for the portion of the investor's capital for which the investor is not entitled to a reimbursement.

Other types of property used as security. The rules in the next two paragraphs apply to any financing incurred after August 3, 1998. You can also choose to apply these rules to financing you incurred before August 4, 1998, but if you do, you must reduce the amounts at risk as a result of applying these rules to years ending before August 4, 1998, to the extent they increase the losses allowed for those years. In determining whether qualified nonrecourse financing is secured only by real property used in the activity of holding real property (#2 under Qualified nonrecourse financing), disregard property that is incidental to the activity of holding real property. Also disregard other property if the total gross fair market value of that property is less than 10% of the total gross fair market value of all the property securing the financing. For this purpose, treat yourself as owning directly your proportional share of the assets in any partnership in which you own, directly or indirectly, an equity interest. Qualified person. A qualified person actively and regularly engages in the business of lending money. The most common example is a bank. A qualified person is not:
1) A person related to you. However, a person related to you may be a qualified person if the nonrecourse financing is commercially reasonable and on the same terms as loans involving unrelated persons. 2) A person from which you acquired the property or a person related to that person. 3) A person who receives a fee due to your investment in the real property or a person related to that person. Other loss limiting arrangements. Your capital, including any equity capital you have contributed, is not at risk in the activity if you are protected against economic loss by an agreement or arrangement for compensation or reimbursement. For example, you are not at risk if you will be reimbursed for part or all of any loss because of a binding agreement between yourself and another person.

Example 2. You are personally liable for a mortgage, but you separately obtain insurance to compensate you for any payments you must actually make because of your personal liability. You are considered at risk only to the extent of the uninsured portion of the personal liability to which you are exposed. You can include in the amount you have at risk the amount of any premium which you paid from your personal assets for the insurance. However, if you obtain casualty insurance or insurance protecting yourself against tort liability, it does not affect the amount you are otherwise considered to have at risk.

Reductions of Amounts At Risk
The amount you have at risk in any activity is reduced by any losses allowed in previous years under the at-risk rules. It may also be reduced because of distributions you received from the activity, debts changed from recourse to nonrecourse, or the initiation of a stop-loss or similar agreement. If the amount at risk is reduced below zero, your previously allowed losses are subject to recapture, as explained next.

Recapture Rule
If the amount you have at risk in any activity at the end of any tax year is less than zero, you must recapture at least part of your previously allowed losses. You do this by adding to your income from the activity for that year the smaller of the following amounts: 1) The negative at-risk amount (treated as a positive amount), or 2) The total amount of losses deducted in previous tax years beginning after 1978, minus any amounts you previously added to your income from that activity under this recapture rule. Do not use the recapture income to reduce any net loss from the activity for the tax year. Instead, treat the recaptured amount as a deduction for the activity in the next tax year. Pre-1979 activity. If the amount you had at risk in an activity at the end of your tax year that began in 1978 was less than zero, you apply the preceding rule for the recapture of losses by substituting that negative amount for zero. For example, if your at-risk amount for that tax year was minus $50, you will recapture losses only when your at-risk amount goes below minus $50.

Amounts Not At Risk
You are not considered at risk for amounts protected against loss through nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements. Nonrecourse financing. Nonrecourse financing is financing for which you are not personally liable. If you borrow money to contribute to an activity and the lender's recourse is only to your interest in the activity or to the property used in the activity, the loan is a nonrecourse loan. You are not considered at risk for your share of any nonrecourse loan used to finance an activity or to acquire property used in the activity unless the loan is secured by property not used in the activity. However, you are considered at risk for qualified nonrecourse financing secured by real property used in the holding of real property. Qualified nonrecourse financing is financing for which no one is personally liable for repayment and that is:

Example 1. In livestock feeding operations, some commercial feedlots offer to reimburse investors against any loss sustained on sales of the fed livestock above a stated

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How To Get More Information
You can order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help. Free tax services. To find out what services are available, get Publication 910, Guide to Free Tax Services. It contains a list of free tax publications and an index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics. Personal computer. With your personal computer and modem, you can access the IRS on the Internet at www.irs.ustreas.gov. While visiting our Web Site, you can select:

information by calling 703–368–9694. Follow the directions from the prompts. When you order forms, enter the catalog number for the form you need. The items you request will be faxed to you.

IRS offices. Some libraries and IRS offices have an extensive collection of products available to print from a CD-ROM or photocopy from reproducible proofs.

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• Ordering forms, instructions, and publications. Call 1–800–829–3676 to order current and prior year forms, instructions, and publications.

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to receive our electronic newsletters on hot tax issues and news. You can also reach us with your computer using any of the following.

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TaxFax Service. Using the phone attached to your fax machine, you can receive forms, instructions, and tax

Walk-in. You can pick up certain forms, instructions, and publications at many post offices, libraries, and

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Index
A
Activity ................................. 2, 4, 6 Appropriate economic unit ..... 6 Nonpassive ............................. 4 Trade or business .................. 2 Amounts not at risk ................... 21 Appropriate economic unit .......... 6 Assistance (See More information) At-risk activities ................... 19, 20 Aggregation of ...................... 20 Separation of ........................ 20 At-risk amounts ................... 20, 21 At-risk limits ......................... 19, 21

F
Farmer ......................................... 4 Form: 6198 ..................................... 19 Former passive activity ............... 2 Free tax services ....................... 22

P
Participation ................................. 4 Passive activity ............ 2, 4, 6, 8, 9 Comprehensive example ....... 9 Credits .................................... 2 Disposition .............................. 8 Former .................................... 2 Grouping ................................. 6 Limits ...................................... 2 Material participation .............. 4 Rental ..................................... 2 Rules .................................. 2, 6 Who must use these rules ..... 2 Passive activity deductions ......... 6 Passive activity income ............... 5 Passive income, recharacterization of ............................................ 7 Personal services defined ........... 2 Publications (See More information) Publicly traded partnership ...... 2, 7

Phaseout rule ......................... 3 Real estate professional ........ 5 Retired farmer ............................. 4

S
Separate activity ........................ 20 Significant participation passive activities ..................................... 7 Surviving spouse of farmer ......... 4

G
Grouping passive activities ......... 6

H
Help (See More information)

C
Closely held corporation ........ 2, 19 Corporation: Closely held ........................ 2, 5 Personal service ................. 2, 5

T
Tax help (See More information) Trade or business activities .... 2, 5 Definition of ............................ 2 Real property .......................... 5 TTY/TDD information ................ 22

I
Income, passive activity .............. 5

L D
Deductions, passive activity ........ Disabled farmer ........................... Disclosure requirement ............... Dispositions ......................... 7, 8, Death ...................................... Gift .......................................... Installment sale ...................... Partial ..................................... 6 4 6 9 9 9 9 7 Limited entrepreneur ................... 7 Limited partners ........................... 4 Losses, closely held corporations 2

R
Real estate professional .............. 5 Recapture rule under at-risk limits ..................................... 21 Recharacterization of passive income ....................................... 7 Reductions of amounts at risk .. 21 Related persons ........................ 20 Rental activity ...................... 2, 3, 5 $25,000 offset ........................ 3 Active participation ................. 3 Exceptions .............................. 2

W
Worksheet Worksheet Worksheet Worksheet Worksheet Worksheet Worksheet Worksheet 1 2 3 4 5 6 A B .............................. 10 .............................. 10 .............................. 11 .............................. 11 .............................. 11 .............................. 11 ................................ 7 ................................ 7

M
Material participation ............... 4, 5 Modified adjusted gross income . 3 More information ....................... 22

E
Equipment leasing ..................... 19

N
Nonrecourse loan ...................... 21

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